How what we learned in retail commerce applies to the consumer lending industry.
A Three-Pronged Recipe for Digital Success in Mortgage Lending
The banking world has seen the emergence of numerous FinTech companies, each trying to either partner with, play alongside or acquire market share from traditional banks. The most potentially disruptive FinTechs provide direct-to-consumer, value-added services that leverage mobility and a streamlined digital experience. They offer a more intuitive and transparent loan origination process to consumers, while leveraging old-line banks as wholesale sources of funds.
As a result, banks stand to lose their long-standing direct relationships with customers. To become more digital-savvy than they are today, banks need to adopt a three-pronged strategy: automate compliance procedures, strengthen mobile capabilities, and introduce micro-services.
First, banks’ processes need to change with respect to legal and compliance. An appropriate underwriting process doesn’t mean a cumbersome, manual one. Many FinTech companies are able to offer loans right on a mobile phone because they don’t require physical signatures, exhaustive documentation, or manual underwriting. They literally do everything electronically recognize that more lightweight process is commensurate with the risk. Banks’ in-house compliance rules prevent them from being as flexible. Banks need to figure out which disclosure(s) are a must and present then electronically wherever possible. Banks must ask themselves if each document and process is required, and what point in the decision cycle. If a particular disclosure is required at the settlement table, then why present it earlier?
Second, banks need to become much better at operating in the digital economy by becoming more mobile-savvy and mobile-ready.
Consider, for example, a top 5 bank’s auto loan process. Car buyers first go to a branch to get approved, then receive a check for a specific dollar amount. Only then does the customer go to a car dealership to look for a car. If the eventual car chosen requires a larger loan amount, then the dealer has a way in, and will offer the buyer his own financing.
So the original check goes to waste, the bank loses out, and the dealership gets the loan. If the bank’s auto lending process were transformed to an app on the buyer’s phone, the borrower could select a car and obtain the proper financing from the bank in real time, perhaps even before visiting the dealership. A much more pleasing car buying and financing experience!
Companies like TrueCar already use this app-driven lending model. Buyers can get approved and get a loan, even though they have no history with TrueCar. And TrueCar isn’t even a bank! All the same, the buyer can drive out of the dealership, all settled.
Big banks are beginning to realize that they’re ceding business to the FinTechs, but are limited in their response due to their weak mobile presences. They consider remote check deposit to be a really ‘forward-thinking’ advancement, which shows how much savvier they need to get to win business. Mobile shouldn’t be an afterthought - banks need to plan for the digital/mobile/real time experience from the outset to recapture and retain market share from the FinTechs.
Disruptive technology like Apple Pay has already shown the global financial sector that simply having the right App can change the entire game, and effectively transform a tech company into a bank. Before you know it, the conversation that FinTech start-ups have started will shift toward simplifying mortgages.
While there certainly is a difference between unsecured loans and mortgages in terms of the scope and scale of regulatory compliance, it is only a matter of time before innovation invades that space, too, and “app-ifies” the process of securing a home loan. Even today, technology-driven closing teams can process documents in a couple of hours. As far as the customer is concerned, that’s rocket-fast, because the next-best firm would have taken a week!
This, by the way, is a niche for which Visionet is particularly well-adapted. Our deep expertise in two different verticals – mobile e-commerce for retailers, and mortgage banking solutions –allows us to translate the strengths of the mobile-savvy retail market and apply them to mortgages and lending. We understand the younger generation of consumers to which banks are trying to appeal, know how to attract them, and can produce a digital marketing strategy that targets them effectively.
Without these changes, FinTech companies will take over the most lucrative, consumer-facing angle of the banks’ business, leaving them with just the low-margin, wholesale side. Mid-sized banks are particularly at risk. Big banks are probably going to figure out these trends first, and in any case, will have the security of maintaining a hold on the wholesale back-end. However, with the emergence of mobile-optimized loan shopping solutions, interested consumers might not even approach mid-sized banks that aren’t digitally prepared, and find other providers instead.
Mid-sized banks run the risk of being completely wiped out from this space if they fail to come up with a solid digital strategy. That’s why banks’ CIOs, CMOs, COOs, and Directors of Retail Banking should act now and stem the ever-increasing flow of consumer-direct business that they’re losing to newer, more tech-savvy competitors. These losses are already adding up for auto and consumer loans, and will soon make their presence known with mortgages, too.
Third and finally, banks need to introduce micro-services.
While the various mortgage origination channels (retail, direct to consumer, broker, correspondent, etc) vary in terms of who performs particular pieces of the process, the origination process itself is fairly well defined, with specific points of entry for borrowers, lenders and third parties. An application is taken, there is a credit or underwriting review, title and document preparation, and so on, and usually several vendors involved to get different tasks accomplished. Once the loan is closed, servicing begins, the loan is placed with an investor, in portfolio, or securitized.
The idea of micro-services takes this main process, breaks it up into more finely-grained steps, and opens those separate services up to a much larger audience. With a micro-services model, one FinTech company may take care of the POS part of a consumer-direct loan, and the lender itself processes and closes the loan. A different vendor could be employed for each tiny step of the origination process, which would keep things flexible and highly competitive.
One vendor might do the title search, but not the title commitment. Instead of printing documents or generating PDFs and sending them over, one vendor might send information to another as XML, who would then generate the relevant documentation, have customers sign it, and then send it back. Yet another vendor might act as post-closing attorney and handle closing, verification, and so on. Once they’re done, each vendor would return the loan to the lender, who would take over from there once again.
I expect many flavors of the micro-services model to emerge, with different companies taking up little bits and pieces of each process and sub-process. This business is going to change, and it’s going to change quickly. That will require a lot of process change, obviously, but also a lot of technological change.
How Do We Make It Happen?
Legacy lenders have three main challenges:
- Legacy technology infrastructure
- Millennials’ perceptions of legacy lenders
- Lack of funds for investment in new generation of IT systems and professionals
These problems can’t be fixed overnight. However, what lenders can do is start small and focus on:
- Deciding which legacy tasks to skip or combine to gain efficiency
- Improving their digital presence and interaction across all channels
- Fixing the customer visible gaps first – the one which take the most time
- Building a digital veneer (workflow) while tasks may be done manually